Today I had a great time sitting down with Michelle Rook on AgWeb's Markets Now to break down what I am seeing in the grain, oil, and livestock markets. Check out the full conversation HERE:
Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, Senior Market Analyst with Barchart. Livestock futures in the red this morning, with grains higher, soybeans leading the charge. Darin, first of all, thanks for being with me. Let's talk about the grain market because we are putting some more premium in, aren't we?
Darin Newsom: Yes, we are. Thanks for having me on again, Michelle. It's just interesting to see. We could have an hour-long discussion on what the changed dynamics of markets these days. We can throw out technical analysis. We can throw out most fundamental analysis. It all comes down to algorithm analysis. These days, it's pretty simple. Algorithms are driven by social media posts and events. What we're seeing right now, particularly this week, it's been a very volatile week, is algorithms continuing to move on what's being posted and what posts are being deleted, interestingly enough.
What we're seeing again is this fear of inflation, long-term, driving the commodity sector higher. Now, again, we'll talk about livestock, but we can set that aside right now. We're certainly seeing it in the energies sector, and the energies is pulling the grains higher. We're also seeing rallies again in the softs market for whatever reason because weather's been fine for most of the softs market. Again, we're just seeing basically across the board in the commodity complex, we're seeing new buying coming in on fear of inflation.
Michelle: For sure. Do the funds continue to add to their position? Do they keep buying in the grains because of that fear of inflation and hedge against that?
Darin: I think so. The reality is, yes, they seem to be driven by each and every social media post. The reality is, if we take a step back, if the engineers or the writers of these, the coders of these algorithms, take a step back and realize what some of the long-term investors do, this thing's going to last a long time. This war is not going to be over just because the US president sends out a social media post that says very completed. That doesn't mean anything. The bombs are still going across Iran, Israel. Strait of Hormuz is still closed, and now it's being mined, or it has been mined.
This war is going to last for a while, and the markets are registering that. Again, it's being led by the energy sector. It's basically the same thing that we saw four years ago when Russia went to war against Ukraine.
Michelle: Darin, IEA released one of the biggest reserve releases, even since we had the Black Sea War that broke out. I think it was 300 to 400 million gallons or barrels. How much will that help? How high could crude oil prices actually get here?
Darin: A couple of interesting points. Great question, Michelle. The first thing that came to my mind when I saw that or heard that or read that, and we have no idea if it's actually true, but was the criticism that the previous administration came under from the party of the regime in power now, just it was the stupidest move ever made by humans, this, that, and everything else. That was to halt prices created by a war that the US did not start for whatever reason.
Well, this one is actually started by the US. The price explosion that we've seen is due directly to moves by the US. How high can we go? All right. We saw almost $120 per barrel overnight into early Monday morning. Then, of course, we get the famous social media post that cut 33% from the crude oil market, the price of the spot month contract by the end of that day. We know the market's comfortable going up to $120. It could certainly go beyond that $140, $150. It depends on how long this lasts.
It depends on how long the country who's benefiting from this the most, being Russia, oddly enough, how long they want to continue to sell cheap crude oil into the rest of the market that can't get it from Iran at this point.
Michelle: Related to that, we had CPI out this morning. It was up 0.3% month-over-month, up 2.4% year-over-year. That is going to change in an awful hurry here this next month with these higher crude oil prices and gasoline prices, right?
Darin: One would think so, yes, but these are government numbers, and you never know [chuckles] exactly how they're put together. There'll be arguments both ways. Yes, theoretically and logically, they should go up because, yes, it's being driven by fuel right now, but the ripple effect, as we're seeing right now because of the buying, it's going to pull food prices up as well. We're going to have food and fuel going higher.
We already know housing's going up. We also know that interest rates aren't going to be cut anytime soon because of this fear of inflation. We're going to stick with interest rates. I'm not going to say high interest rates, but certainly higher interest rates than what the administration and those backing the administration want at this point. The idea that we're going to immediately continue to chop away at the Fed fund rate isn't going to happen. We've got a meeting coming out next week.
All of these things are going to add up, and all of these things are going to mean higher consumer prices, which I think is part of what we're seeing weighing on both US equity markets and the live cattle market.
Michelle: Yes, I would agree with you about that. We can talk about that in a moment. Meanwhile, bean oil is screaming higher this morning. There was a rumor that the RVO levels, which are supposed to be released yet this month might be as high as 5.4 billion gallons on biomass-based diesel. 70% of the SREs might be reallocated to refiners. I know it's just a rumor that's moving the market, but do you see this happening?
Darin: No, I don't. We've heard this before. The powers that be have to make waves in markets. This is something we've seen for the last decade, the last 10 years, that things are said, rumors are released, market reactions are watched and tracked. That way, when rubber really hits the road, then they know exactly what to expect, what to say. Let's say we get closer to an election and the US soybean industry is still struggling. Now they know. Let's say we're going to have all this crushing and we're going to have all of this renewable diesel demand, we're going to have all this.
The same rumor gets floated again, expecting everything to rally, everyone to forget what's happened, and the vote to go a certain way. This is the game that we have found ourself in. Do I believe this is going to happen? No. Over the last 20-some years, we've heard the same thing. Renewable diesel is going to do this, the US is going to do that. US crush is going to make it so that US doesn't have to export any soybeans. It's all ridiculous. We'll see what happens right now. It certainly has triggered the algorithms.
Michelle: Meanwhile, you have what's going on geopolitically, and China's two of their biggest sources of cheap oil cut off. That would be Iran and Venezuela now. Why have they not canceled the meeting that we are supposed to have at the end of March, early April?
Darin: I have a feeling they probably will. There's no benefit to China to attending the meeting. Right now, they still have one of their bigger suppliers of cheap oil still available to them. That's not going to get cut off because, again, Russia is benefiting from all of this. That was the game plan. How can the US best help Russia? This is certainly going against taking over Venezuela, bombing Iran, all of these things, has certainly helped Russia standing not only globally, but also on the crude oil trade.
All of this is being played out pretty much as it was designed. Will China attend the meeting? I doubt it. Again, similar to what we just talked about. I don't see any reason for China to attend this meeting. If they do, there's nothing that's going to happen there.
Michelle: If the last two things we talked about don't happen, robust RVOs and no China meeting, we're going to take a lot of premium out of this market in a big, big hurry. In the meantime, like we said, funds are buying due to inflation fears. What has this done? Has it changed basis or spreads or not in the grain?
Darin: This is where we're starting to run into some problems. How much can we believe spreads since the nearby contracts are getting overloaded? I can't believe I'm the one saying that there comes an asterisk now with the spreads. If we just boil this back to basis, we continue to see weak basis in both corn and soybeans and the wheat markets and so on. This tells us, and really basis is the last defense of the commercial side of the market, of merchandisers in the market.
If we want to talk about spreads being skewed, we can look at what's happened, again, in the bean oil market, where we had the May shoot to a strong inverse over the July when it had been weakening for quite some time. Again, I think a lot of it, I think we are seeing these spreads, at least the spot spread, being skewed by the headlines, by the social media posts. If we look further out, we are still seeing strong carries across the board in the grains sector. This tells me that the commercial side still is not bullish, still is not worried about supply in relation to demand. Their defense, as I said, is still basis, and those markets are still weak.
Michelle: For sure. You mentioned it a couple of times—the cattle market has been following what's going on, especially over in the S&P, but we're also concerned about higher gas prices impacting consumer beef demand, aren't we?
Darin: Yes, we are. Again, we've got all of these things going on. We've got the weakness in the equities market. Historically, there's been at least a weak or casual link between the US equities, and particularly the live cattle market. I haven't heard anything on the cash market, but by looking at the commercial selling, that's starting to hit the future spreads here in cattle. Again, these spreads could be skewed. If I look at the April-June spread, it could be skewed, again, by funds getting out of the cattle market.
We've seen it drop from bullish levels here a few weeks ago through the neutral territory, through the neutral area, and is now approaching its five-year low weekly closes. This would tell us that the April-June spread's actually getting more bearish, what would indicate increased commercial pressure for all the reasons you mentioned: lack of consumer demand, fear of inflation, higher gas prices, and all of these things could be weighing on the cattle markets at this time and could stick around for a while.
Michelle: One last quick question, Darin. Amidst all of this, what should grain or livestock producers be doing to position themselves during all of this volatility?
Darin: Drink heavily. No. It's difficult. It's difficult because, given the volatility, you can't go in and buy options. It's expensive to do that. Your risk is high if you go in and hedge. You might be able to do some cash contracting. You might be able to get some hedges in place, knowing that the fundamentals don't support this rally. Again, take a shot. Take a look at what you can do. If the prices are good enough, go ahead and lock some in. Then wait to see what happens.
Michelle: All right. Thanks so much. That is Darin Newsom, Senior Market Analyst with Barchart and Markets Now.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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